One day after we asserted that the words of GameStop CEO Dick Fontaine might give us a clearer perspective on industry hardware sales, we’ve learned that the data GameStop holds, and on which he bases those words, may not be nearly as valuable as we’d anticipated. Wedbush Morgan Securities analyst Michael Pachter alleges that the company lost significant hardware market share to mass merchant retailers in Q1.
Though GameStop reported increased hardware sales in their Q1 earnings report yesterday, Pachter explains that the reported increase was not in line with the overall, national hardware sales increase, indicating a loss of market share:
We think that the most important metric from yesterday’s earnings call was the company’s hardware sales growth. GameStop grew hardware sales by only 21% during the quarter, while U.S. hardware sales increased by 49% and international hardware sales increased by an estimated 20%. Given that GameStop has the bulk of its stores (and revenues) in the U.S., we believe that the company’s overall hardware sales performance reflects a loss of share to mass merchants during the quarter.
This is not to say that GameStop is losing market share on all fronts; only the one that counts for the most. Nintendo consoles, Pachter contends, appeal to consumers who shop at mass merchants:
It appears that GameStop is maintaining its hold on hardcore consumers, and we believe that the company is positioned to thrive as sales of Sony PS3 and Microsoft Xbox 360 grow; however, it appears that the Nintendo brands appeal to a more mass-market consumer, who is comfortable making a purchase at the big box retailers. We believe that GameStop’s loss of hardware market share during the quarter portends a continuing loss of hardware market share throughout the year, with the consequence that purchasers of hardware at mass merchants may return to purchase software at those same mass merchants in the future.
We continue to believe that GameStop will execute phenomenally well as the retailer of choice for the hardcore gamer, and believe that the company’s addressable market will continue to expand. However, we think that the Nintendo addressable market is growing at even a faster clip, and our perception is that the majority of that market is well-served by big box retailers.
Pachter had already predicted a hardware sales shift towards mass merchants at the end of Q4 in March — it appears he may have been on the money.
If Blockbuster Video does indeed open games-only retail stores in the UK, I wonder if they might take advantage of their (comparatively) mainstream image, and build a store that could capture mass-market-oriented consumer dollars as well as those of their hardcore counterparts.
UPDATE: 5.27.08: Wedbush Morgan Securities issued a corrected note today; they accidentally swapped hardware and software sales percentages and thus drew the conclusion that GameStop lost far more hardware market share to its competitors than it actually did. Analyst Michael Pachter explains:
We based our conclusion in part on a misstatement of the hardware and software growth rates in the U.S. during GameStop’s April quarter. Specifically, we erroneously juxtaposed the growth rates for software and hardware in the U.S. Our note stated that U.S. hardware growth for the period was 49%, when the actual rate was instead 30%. Similarly, the U.S. software growth rate was erroneously listed at 30%, when the actual growth rate was 49%. As a result of these errors, we highlighted our conclusion that GameStop lost more hardware market share than it actually lost during the quarter.
Upon reflection, we continue to believe that GameStop lost hardware market share, as its actual hardware sales growth was 20.5% while hardware sales in the company’s addressable market grew by at least an estimated 25% during the quarter. We calculate this growth rate by assigning the true U.S. hardware growth rate (30.3%) and an estimated international hardware growth rate (20%), and weighing GameStop’s U.S. presence (76+%) and international presence (23+%).
Not nearly as drastic a loss, to be sure.
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